Wednesday, December 11, 2002
Chris Neal, Guillermo Perry,
and Richard Newfarmer
MR. NEAL: Welcome, everybody. We will now start off with the Latin American briefing. I would like to just get started.
I'd like to introduce our speakers. Guillermo Perry, who's Chief Economist for the World Bank in Latin America and the Caribbean, and he will, jointly with Richard Newfarmer, who is from the Development Economic Prospects Group, will make a presentation on prospects for Latin America based on the Regional Economic Prospects Section at the back of the Global Economic Prospects Report.
So, without further ado, I'll pass it on to Guillermo Perry.
MR. PERRY: Welcome. The reason why we are doing this special brief on Latin America comes from this graph that is in the report, which indicates that, on average, Latin America seems to be falling behind the recovery in developing countries, and the related explanation that the report gives that the region is especially subject to capital flow reversals and that there might be most of the explanation. So we just wanted to offer a few insights more on this and be open to your questions.
This comes from the annex, which I suggest that you take a look at the original annex, and of course, as the book says, 2002 is very bad because we have a negative GDP growth. However, that doesn't mean that the whole region has a problem. Nevertheless, it's had significant problems this year.
If you look at the Caribbean, it has a relatively healthy GDP of 3.6 percent. It's not as strong as in 2000, but that's quite reasonable.
Central America, also, in general, has slowed down somewhat from where it was, but it's not in a recession. If you look at the rest of the countries in Latin America without Argentina, it's not good, but not too bad. It's similar to last year.
Of course, a big factor on growth in LAC is Argentina. If you took Argentina out of the equation along with the countries that have been hit by Argentina's contraction -mainly Uruguay which had a major contraction as a consequence of Argentina's situation, together with the financial problems of Paraguay, which was also hit very hard, then things would not look as bad, but still they are not good either.
Now, it is true that capital flows and growth have a close correlation in LAC. So let's look at this a little. This is growth from '95 onwards, the trend and averages in the region -and you see gross market-based flows- really just meeting the "I," there is a very strong correlation, and if you do the econometrics, it comes out as well, and it has a clear reverse correlation with spreads. Something happened with the spreads graph. It changed colors, I don't know why, but in any case, you see that spreads tell the story of capital flows very well in the sense that when spreads go down, capital flows go up; when spreads go up, capital flows go down, and this is the same in the last period.
Now let's see a little bit what happened with those capital flows to Latin America. You see that net private capital flows total, not only debt-related, but FDI was about $127 billion in '97. It came down all these years after Russia to $61-, and this number please don't quote at this moment because this was a preliminary forecast that is being revised, and actually it's not going to be as bad. It's going to be a little better. Last month was relatively good, in terms of capital flows, but still there is a continuous drop.
Now the drop is basically in debt-related flows, which were $48 billion, a minus 10 last year. This is not going to be as bad, the minus 20, but it's going to be worse than last year, so, really, we are having a problem, especially with bank financing. There is no bank financing. So the net flows are negative in Latin America, but it is going to be a little better than this. They are recovering a little bit.
FDI has also gone down, but if you take the numbers in '97, which were really very large compared to the beginning of the decade, the reduction is not so significant, and after all we were over the peak of the privatization process, so it is natural to expect some reduction of FDI.
Another one of the areas that has been reduced more in FDI in Latin America is foreign investment in telecommunications, and that's happening all over the world. It was an important part of this.
FDI has some issues that one has to take into account, that of the peaks. For example, you have here the peak of the YPF privatization in Argentina, and you also have last year the Banamex in Mexico. So you have to look at the longer trend in FDI, and that is not so bad. There is some reduction.
Now, going back to the issue of capital flows in the short term, that spreads are good inverse reflection, you see that in 2001, actually, spreads were coming down for most countries, except two--Argentina, that went through a crisis, and then Argentina took with it Uruguay as a casualty. The rest were going down.
Something happened between May and June, and it is a combination, and then all of them went up, and it is a combination of two things:
The turmoil in international and financial markets, which were discussed here, of the problems that began earlier in the year with Enron, but that around June, with WorldCom and others, people realized this was a wider problem, and really investors became very risk-averse since early summer, overall.
So the widening of spreads was not only a Latin-American phenomenon, it was also here in the U.S. for non-Triple A companies everywhere and the uncertainty in Brazil.
The two things, and they are difficult to separate, but probably just the uncertainty, in political terms in Brazil by itself, if there was not an increased risk-aversion in the markets, could not have been so serious, the two things combined.
Now this period had a peak, and it's coming down. It's coming down very clearly in most countries, a perception of Argentina that it is more or less stagnant, but even in the case of Uruguay, Brazil, Colombia, Peru, every other one, most of them are already back to where they were before this period of turmoil came.
Now this is not to say that we are sure that this was, let's say, a negative bubble in the financial markets. The uncertainty has not gone out completely, but things appear to have calmed. If they continue to be like that, then next year for Latin America can be even better than what we have put here in the report.
What we put in the report is a relatively conservative reaction, given what we were seeing in terms of this, but there is uncertainty in these projections because it is very difficult to project what is going to happen with the international financial markets. Obviously, there is also uncertainty on domestic issues, especially there is still some uncertainty in the case of Brazil. Things have become to be much more clear now that the new government is going to basically follow the same prudent microeconomic policies, and this, together with what is happening in the markets, is calming the markets in Brazil. Argentina has brought them up, and we are expecting some recovery, but of course there are still, with the figures in the rest of the countries, a very clear recovery at this moment.
I didn't bring this, but I did take all of the indicators, short-term indicators, those of industrial production, in terms of consumer confidence, in terms of other things. In Chile, the recovery is very clear. In Mexico, it's relatively clear. In Peru, it's very clear. In Colombia, it's more or less or clear. So in most countries you are seeing this now.
That's the reason why, during his recent trip to Latin America, Jim Wolfensohn said we, at the Bank, feel that the markets have been excessively pessimistic with Latin America in the previous months, and we don't see a reason for such strong pessimism.
Just to finalize, this is an indicator of contagion from the spreads. This co-movement of spreads is explained by external factors or by internal contagion in the region. And what we have seen with this indicator is that after major crisis, this indicator goes up very strongly. After Russia, it did. Then, it began to come down--
MR. NEAL: Meaning, when it goes up it means?
MR. PERRY: This has a very high correlation, exogenous correlation of spreads. Everybody moves at the same time, so it's high contagion.
So it was coming down after Russia. This little blip initially was the Brazil devaluation, but it was very short-lived. Then, it was not significant, basically. Then, when Argentina's problems began, it went up again, not as big, and then there was the famous decoupling from Argentina that all of us mentioned by November last year.
The peak was a combination of Argentina and September 11th, and then it was coming down to non-significant levels again, completely coupling, and then this combined effect of the problems in the international and financial markets and the political uncertainty in Brazil came, and it went up, not as high as before, but it went up, and now it's coming down again.
So let me just stop there and hear your questions.
MR. NEAL: Thank you, Guillermo.
We'll go to questions. Ruben Barrera? If you could identify yourself, please.
QUESTION: Ruben Barrera, with the Mexican News Agency, Notimex. Two questions, Mr. Perry.
The first one is how can you associate what's going on right now across Latin America to make this projection, especially when we don't know if the crisis in Argentina will be, you know, about--shortly end. We are seeing that the crisis in Venezuela is getting higher, and the same time we don't see any type of resolution in Colombia, and Paraguay and Uruguay still are presenting the impact of the crisis in Argentina. That's the first question.
The second one is, clearly, Mexico and Chile were out of this picture or it paints a pessimistic picture for most of the countries across the region. In the case of Mexico, what is it you forecast, in the sense that the reforms that the government has been pursuing since the last year didn't get any concrete realization, maybe next year? What are the chances that the projections of some growth in Mexico could be dampened if this reform doesn't take any concrete--
MR. PERRY: Precisely because there are still uncertainties, and we are not expecting, for example, a strong recovery in Argentina, as yet-- we expect some beginning of a recovery and so on--is that the projection is a modest 1.8 percent here for next year, otherwise it would be stronger.
Clearly, there are downward risks. I said it's very difficult to project now because of the uncertainties in the international and financial markets and also some domestic uncertainties, especially the uncertainties in Argentina and in Brazil. I think the one in Brazil has been reduced significantly, but there are still some risks that were raised.
In Argentina, we feel that, clearly, the crisis has bottomed. All of the indicators show that for several months now, both real indicators--industrial production is up, GDP indicators have bottomed, deposits have grown, exchange rate has stabilized and so on.
Now, does that mean that things are over? It depends on the measures that are taken from now on. It's still not recovering. It has bottomed out at the low level, but there is still the need for an important recovery, and that depends on other things; on continuing with the policies and doing something additional, et cetera. Although in Uruguay we think the policy response has been excellent, but nevertheless, Uruguay's fate is pretty much linked to Argentina. It's a very highly-dependent economy, and you don't break these dependencies in a short period of time.
Now, Venezuela is a different case. Although Venezuela is a big contraction, it is completely due to domestic political events. This is the first time in the history of modern Venezuela in which despite high oil price, you have an economic contraction. That has never happened in the past, and that indicates clearly that there is a homemade problem -basically, political uncertainty and uncertainty on economic policy. Investment is down, private investment is really at the lowest in decades, and there is a very strong capital flight, so those things explain the problem.
Venezuela only hurts one country in the region, which is Colombia, which has strong trade connections with Venezuela. Nonetheless, Colombia has managed to weather it out, relatively.
You mentioned that problems in Colombia have not been completely solved. The public-order problem will not be solved in the short term, but actually what the country is trying to do, what the government is doing, I think, is very positive in almost every way that you look at it.
It's trying to get control of the problems of public order. It's advancing a lot in that, and at the same time it's doing a fiscal adjustment, which is really tough to do the two things at the same time, but so far they are succeeding, and the country is behind the government, and they are getting cooperation from their Congress. The markets are reacting well, and the economy is reacting.
There is a recovery on the way. It's not very strong, but if you see the consensus forecast, there are two countries for which the forecasting in the last months have gone up, instead of down, and they are Peru and Colombia.
Mexico and Chile were basically out of this? Well, no, they had some effects. I mean, the reason why Chile is 2 percent is because it did have some effect of these problems of their neighbors and of the reduction of capital flows, but it's recovering now very strongly. Mexico is. Other countries were also hit just in a small amount--Central American countries, Caribbean countries there.
Now, growth in Mexico, does it depend on reform? I could say, in the short term, we expect a strong and important recovery in Mexico just based on the things that Mexico did in the past and NAFTA. That offers a lot of stimulus if the U.S. economy stabilizes. But for more of the medium term, the answer is, yes. I mean, will Mexico be able to keep the high growth of '96 to 2001 for the next 10/15 years? It depends on what it does, and there the answer depends a lot in the success of the reforms.
QUESTION: Anna Baron, Clarin, Argentina.
I wanted to know you say that Argentina's situation has stabilized, and you expect perhaps some recovery. The stabilization has been taking place without an agreement or in spite that we don't have an agreement with the IMF. Do you think that if we don't agree with the IMF, some recovery can take place the same way that the stabilization has taken place without an IMF agreement?
MR. PERRY: We hope that there is an agreement. We see significant advance in the discussions, and we don't see a major reason why there shouldn't be an agreement. The last push should be done from both sides because that would help consolidate the possible recovery.
We haven't done a scenario for what could happen without that, so I cannot answer that question because we are very confident and hopeful that things will get arranged.
QUESTION: So the scenario is with an agreement. Would you say that you--
MR. PERRY: It's basically with an agreement, yes.
QUESTION: Can I just--
MR. NEAL: Would you like to add in?
MR. NEWFARMER: Yes, just one question, which I think is that the agreement would open up the way for a return to normalcy in capital markets, which really are important to Argentina. I think without that kind of rekindling of confidence of capital markets, that certainly that two or three years ahead would be much darker than it would be if they had a program that was internationally supported.
MR. NEAL: Would you agree with him?
MR. PERRY: Yes, I agree with that. It's difficult to see the effect in the very short term, but for the next years, at some moment the country needs new capital flows, and without an agreement you won't get them.
MR. NEAL: A question over here? Jose Carreno?
QUESTION: [Off microphone.] Do you have any idea of what percent or to what degree a capital [inaudible] has been for domestic capitals for security or have been [inaudible]?
MR. PERRY: Which countries?
QUESTION: [Off microphone.] Basically, Argentina, Brazil, Venezuela.
MR. PERRY: Overall, we have seen in these past years some increase in capital flight, but less than what we were seeing, say, in '99, less overall in the region. Now, it depends on which countries. Obviously, it was quite concentrated in the cases of Argentina and Venezuela, not so much in the case of Brazil. In the case of Brazil, it was more reduction of foreign in-flows and not so much a case of other countries.
So it was not a very generalized or strong phenomena. It was quite localized in a couple of countries.
QUESTION: [Off microphone.] So then would this be domestic capitals or--
MR. PERRY: In those two countries? Yes. I mean, both things. In Argentina, it was both capital flight and reduction of external flows, and in Venezuela it's mostly, I mean, capital flows to the country were low already before. So what has continued to happen is mostly capital flight, but again it is a problem, it is an issue that has been mostly concentrated in those two countries.
MR. NEWFARMER: Can I add a point just from a global perspective, Chris, and that is I think what we've seen in experiences in other crises around the world, for example, East Asia, is that foreign investors and domestic investors pretty much work together or not work together, but behave similarly in response to the same economic signals.
So I would predict that if we were able to decompose this, and I'm not sure that we're able to, but if we were able to, we'd find that, roughly, the level of capital outflow would be proportionate to the relationship between domestic and foreign investors in the economy.
There is often a difference in sequencing. It turns out that domestic investors, at least in the East Asia case, were a little more sensitive to what was going on in the policy environment and moved out faster than did the foreign companies, but basically, after a period of time, it seemed to be the score was more or less equal.
MR. PERRY: But I think one has to understand this in the context of a problem derived from domestic policies. So, clearly, when there is a problem of confidence because of the domestic set of policies, like it was the case in Argentina, and like it is the case in Venezuela, then you have both things, like Richard said--a reduction in capital flows from outside and a capital flight.
When what you have in some countries is just basically contagion, as was the case in many other countries, it's mostly a reduction of capital flows, and very little increase in capital flight, and that's why I say the story is very different from the case of Venezuela and Argentina than from the other countries in terms of the capital flight.
MR. NEAL: A question here from Sergio Serricho?
QUESTION: How sensitive is the outlook for capital flows to Latin America that it's turning to so important for GDP growth in the region? How sensitive it could be that those flows to the negotiation of Argentina debt? Argentina has been dragging along without an agreement with the IMF, but it's also after that, they have to also negotiate their debt with a big discount is expected.
The other thing is how sensitive is it going to be, the capital flows to Latin America, if Brazil, and it looks like Brazil is not off to a good start, I mean, it's not necessarily going to default, but with problems dragging and uncertainty?
MR. PERRY: I think that as you saw in the graphs on the contagion index, during the period in which the Argentine crisis was unwinding, there was some contagion to the rest of the region, and then at some moment it went off. At some moment the markets had discounted that, had separated the case.
Now, as you saw since May-June, there was an increasing contagion. It's difficult to separate to what extent it was due to the political uncertainties in Brazil that increased risk aversion for investors on the rest of the region and to what extent it was driven from New York, from the problems in the international and financial markets. Both things were there.
So as both things were there, we would expect that if things go wrong in Brazil, that would have consequences for capital flows to the rest of the region. We think the problems in Argentina have basically been discounted by the market, but in Brazil we are optimistic and more today after we have been discussing with the new government in detail what they plan to do, and we have seen the steps that they have been taking to and the discussion with the market in their policy announcements.
So we are positive, we're optimistic, but there is a risk. I mean, one has to recognize that there is a risk because there are vulnerabilities there, and if something bad happened there, that would affect the rest of the region.
In that case, the projections would probably be, the actual output would be actually lower than what is here. It could be more towards what is presented as a low-case scenario. Of course, the low case here is all things going bad at the same time in the international markets, in the developing countries, and in the oil market.
MR. NEAL: We have time for two more questions. Mark Drajem had his hand up here.
QUESTION: I'm Mark Drajem from Bloomberg.
Today, Lula's team is meeting with bankers in New York to try to convince them to resume their flows to Brazil. Do you think, given the fact that you've seen bank flows collapse over the last five years, that this is a good policy to try to strong-arm banks or should the Brazilian authorities just get used to life without bank loans?
MR. PERRY: Well, when I said that bank lending had basically collapsed, I was referring more to medium-term lending, net lending, but trade finance is essential for every economy, and something that was happening in Brazil is that trade lines were shortening, and that is something that really is very important that is reversed.
I think it has been reversing already. I mean, what you have seen with the reduction in spreads already and the stabilization, some stabilization on the real, is a symptom that these capital flows are coming back. So it does make sense to try to keep these the trade lines.
Also, banks continue to be important for the private sector more than for financing of the government.
MR. NEAL: Any other questions?
MR. NEAL: Well, if there are no other questions, then thanks very much for coming, and have a good day.
[Whereupon, at 11:44 a.m., the press briefing was adjourned.]